Friday, 17 October 2014

Need to rein in Ponzi schemes

In what could be described as a welcome move, the
Department of Financial Services of the Union Ministry of Finance has decided
to clamp down on Ponzi schemes which are thriving throughout the country in the
name of selling products and services. With several people fleeced by them
filing criminal cases against these companies, the Union Ministry of Finance
has woken up and taken stock of the situation. It augurs well for the Modi
administration to get tough with the illegal money circulation schemes or Ponzi
schemes by bringing in the toughest of norms to rein in the money circulation
schemes and pyramid marketing businesses. The new norms, it appears, would
include a detailed definition of ‘money circulation schemes’ to cover all
money-pooling activities with a corpus of less than Rs 100 crore as well as
those not covered under the collective investment schemes regulated by the SEBI.
As the SEBI can only deal with illicit money-pooling activities with a turnover
of Rs 100 crore or more, the ponzi operators are running at times multiple
small schemes rather than a single big one. This has to be taken under
consideration before framing of new rules to rein in all the ponzi schemes.

However, one has to wait and see the outcome of these
proposals. In relation to the amendments to the PCMCSB Act, the draft proposals
would be first discussed by various ministries concerned before they are placed
before the Union Cabinet for approval. It would be better if the draft
legislation is forwarded to the consumer organisations for their views as
larger issues are involved. Since the Consumer Affairs Ministry has to decide
whether to seek a separate legislation to cover the direct selling companies,
these companies may lobby hard for legislation in their favour. The Enforcement
Directorate decided recently that Amway alone has siphoned out Rs 8,000 crore
illegally out of India. Against this backdrop, the Consumer Affairs Ministry
should thoroughly look into all angles of the issue before preparing guidelines
for direct selling. The Kerala State government has already prepared some
guidelines in this respect, and the Consumer Affairs Ministry could well study them.
As SEBI chief U K Sinha rightly pointed out, some action is required in the
area of multilevel marketing (MLM) and PCMCSB Act. It is high time all the
loopholes are plugged. In a welcome move, the Central government is said to be contemplating
heavy penalties and even imprisonment for the managements of companies or
individuals running such type of illicit schemes. It has been estimated that
people all over India have lost about Rs 3 lakh crore in the schemes illegally
run by these fraudulent companies. It is desired that the Union Ministry
Finance should take a right decision to completely banish such schemes in the
larger interests of people.